Where Investors Can Turn In Gloom and Doom Market

A summer stock rally has ended with a resounding thud as investors—once optimistic that the worst was finally over—are now fretting that the worst is yet to come.

"I can just tell from trading it's not a good environment out there," says Dave Rovelli, head of US equity trading for Boston-based Canaccord Adams. "It just doesn't feel right. It feels like it's going lower."

A plethora of bad news in recent weeks—from a worsening credit crisis to a further slowdown in the global economy— seems finally to have caught up with the market.

As a result, market pros are advising investors to stick with stocks but look for safer bets in blue chips and well-known, solid companies.

Stocks tumbled again on Tuesday on indications that inflation remains a major threat to the economy, while housing is stuck in neutral and geopolitical tensions and the global economic slowdown point to further troubles for the economy.

Meanwhile, speculation this week that mortgage giants Freddie Mac and Fannie Mae might need to be recapitalized reminded Wall Street that the financial crisis is far from over. In fact, there seemed to be more worry about the imminent failures of more banks than in whatever troubles the two government-sponsored entities face.

Moreover, the Federal Reserve is essentially stuck. It can't raise interest rates and risk steepening the recessionary climate, nor can it lower rates and fuel inflation. After the inflation data came out before trading, Fed fund futures were little changed on prospects that the Fed would raise rates this year.

Could Last 'A Couple Years'

"I think we're stuck in a downward channel for a couple years," says Chris Orndorff, head of equity at Los Angeles-based Payden & Rygel. "This process of deleveraging that's occurring is a very significant headwind for the economy. It's going to take a while for the banks to right themselves."

Beating the bear with big-cap stocks. Watch video at left.

Many advisers are consequently steering their clients away from financials and into safer market bets.

"I would not be buying these financials yet," says Rovelli, though he does not believe the sector will necessarily hit its July lows.

In the meantime, he is joining a fairly widespread chorus that has investment advisors turning away from the small-caps that generally take the market out of a bearish environment and instead are heading toward the tried and true.

"I would buy stocks that have worldwide exposure. I'd buy blue-chip names definitely," he says. "Buy in different sectors, spread out your portfolios, adjust and buy the best names."

Among them: tech stalwarts Research in Motion and Apple , along with some of the leaders in energy. Rovelli also advocates Hudson City Bancorp for those needing a financial component, because the bank does not have subprime exposure that has dogged so many of its peers.

Consumer Staples, Heavy Metals

Dips in the market always provide opportunity, and the appetite among most market pros for this environment is for as little risk as possible.

"Rather than trying to time the market I would stick with a defensive portfolio," Orndorff says. "You want to look at things with relatively stable cash flows, relatively predictable earnings."

In sector plays, Orndorff likes consumer staples, health care, and selected plays in information technology.

"In the biotech space we're seeing the next generation of some blockbuster drugs coming out, which I think are going to be pretty significant," he says.

Paul Schatz, president of Heritage Capital, sees some short-term plays in agriculture and metals, two areas that have suffered during the blowout in commodity prices over the past two months.

See Schatz's full analysis in the video at left.

"On the financials, I wouldn't short them and I wouldn't buy them. I would avoid the sector totally. To me it's dead money," Schatz said on CNBC. "Until there's some clarity--clarity means that things calm down and volatility calms down--I wouldn't go near financials. In the short term, I think energy, metals and the agricultural areas are going to bounce." However, he thinks the play won't last long, and those areas will "roll over to much lower levels later this year."

But Rovelli says investors with a short-term outlook face troubles by a market that is likely to continue to be volatile. Longer-term investors, though, can find value in some beaten-down shares.

"If you're a long-term investors this is a great opportunity," he says. "If you're short-term, I would sit on the sidelines."

© 2009 CNBC.com